Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Are accelerated benefits due to chronic illness subject to income tax if the policy is owned by someone other than the insured?

Answer: Accelerated benefits are generally treated as death benefits and are therefore not subject to ordinary income taxes—with one exception.

If the accelerated benefits are paid to someone other than the insured by reason of the insured being a director, officer, or employee of the policy owner or by reason of the insured being financially interested in any trade or business carried on by the policy owner, then the accelerated benefits are taxable. See Code Section 101(g)(5); IRS Publication 554, pages 16-17.

For example, if the insured’s wife owns the policy, the accelerated benefits would not be subject to income taxes; but if his employer owns the policy, the accelerated benefits would be taxable.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.